The relationship between Economic Value Added (EVA) and stock returns of JSE listed companies
Economic Value Added (EVA) is a performance metric that calculates the creation of shareholder value and it is a registered trademark of Stern Stewart & Co. EVA has been widely adopted by management and investors to assist with the decision making. One of the ongoing academic debates surrounding EVA, concerns the claim made by Stern, Stewart & Co. that EVA predicts stock returns and that it is superior in its prediction compared to the traditional performance measurements. While extensive research has been done on the relationship between EVA and stock returns internationally, the aim of this research was test this relationship for Johannesburg Stock Exchange (JSE) listed companies, in order to give the research a South African context. This study analysed a pooled, time series, cross-sectional data of 59 JSE listed companies for a period of 10 years, i.e. from 2003 to 2012. The study has attempted to examine whether the value based measure of EVA has any explanatory effect on the variance in stock returns. A second objective was to establish if the EVA metric is superior to the traditional accounting metrics of return on assets (ROA), return on equity (ROE) and earnings per share (EPS) in predicting stock returns. Using panel regression techniques, the study found no clear evidence to support Stern Stewart’s claim that EVA predicts stock returns and that it is superior in its prediction compared to the traditional performance measurements. The empirical evidence ix suggests that South African market does not seem to be responsive to EVA and this needs more ongoing investigation in future research studies.
Johannesburg Stock Exchange , Corporations -- Finance -- Mathematical models , Economic value added